September 13, 2005, Meeting Highlights

 Jay Hartig, Chair

 Gerard Brinkman

 Jack Ciesielski

 Greg Clifton

 Melanie Dolan

 Clarence Ebersole

 David Follett

 Karin French

 Steve Henning

 David Hinshaw

 Chris Holmes

 Jeff Lenz

 Scott Pohlman

 Amy Ripepi

 John Riley

 John Wolfson

 B. Securities and Exchange Commission

 Office of the Chief Accountant

 Don Nicolaisen, Chief Accountant

 John Albert, Senior Associate Chief Accountant

 Edmund W. Bailey, Senior Associate Chief Accountant

 Jennifer Burns, Professional Accounting Fellow

 Robert Burns, Chief Counsel

 Cathy Cole, Associate Chief Accountant

 Greg Cross, Assistant Chief Accountant

 Julie Erhardt, Deputy Chief Accountant

 Mike Gaynor, Professional Accounting Fellow

 Len Jui, Assistant Chief Accountant

 Mike Kigin, Senior Associate Chief Accountant

 Timothy Kviz, Professional Accounting Fellow

 Cheryl Linthicum, Academic Fellow

 Tony Lopez, Associate Chief Accountant

 Joseph McGrath, Professional Accounting Fellow

 Jennifer Minke-Girard, Senior Associate Chief Accountant

 Brian Roberson, Professional Accounting Fellow

 Esmeralda Rodriguez, Associate Chief Accountant

 Nancy Salisbury, Senior Associate Chief Accountant

 Pam Schlosser, Professional Accounting Fellow

 Charlotte Thomas, Research Specialist

 Cheryl Tjon-Hing, Valuation Specialist

 Teri Yohn, Academic Fellow

 Division of Corporation Finance

 Carol Stacey, Chief Accountant

 Craig Olinger, Deputy Chief Accountant

 Louise Dorsey, Associate Chief Accountant

 Stephanie Hunsaker, Assistant Chief Accountant

 Todd Hardiman, Associate Chief Accountant

 Jonathan Ingram, Deputy Chief Counsel

 Joel Levine, Associate Chief Accountant

 Andrew McLelland, Academic Fellow

 Rachel Mincin, Associate Chief Accountant

 Leslie Overton, Associate Chief Accountant

 Michael Stehlik, Business Associate

 Sondra Stokes, Associate Chief Accountant

 Division of Enforcement

 Charles Wright, Senior Legal Advisor

 Division of Investment Management

 Brian Bullard, Chief Accountant

 Toai Cheng, Assistant Chief Accountant

  C.  AICPA Center for Public Company Audit Firms

 Lillian Ceynowa

 Annette Schumacher Barr

 D.  Guests

 Bob Guido, PwC

 A. Use of Market Instruments in Valuing Employee Stock Options

B.  Materiality

C. International Financial Reporting and US GAAP

D.  XBRL Technology

E.  Elimination of Complexities in Accounting Standards

F.  Compliance with Section 404 of the Sarbanes-Oxley Act of 2002

G.  Internal Controls for Smaller Businesses

H. Audit Committee Assessment of Auditor Independence

I.  Structured Transactions

Jack Albert noted the following personnel changes in OCA:

• Four new PAFs joining the staff for two-year terms beginning this summer are Timothy S. Kviz, Joseph B. Ucuzoglu, Michael G. Gaynor and Joseph D. McGrath. Outgoing PAFs are Robert J. Comerford, Russell P. Hodge, John M. James, and Chad A. Kokenge. In addition, Cheryl Linthicum, Mark Taylor and Teri Yohn joined the staff as Academic Accounting Fellows for one-year terms that began August 2005.
•  A new 2 year program in OCA was recently initiated -"General Business Associates" — these individuals will assist in the research and drafting of OCA positions and projects.
• Jane Poulin has left the Commission to take a position in industry.

 B. Division of Corporation Finance (Corp Fin) Update

Carol Stacey provided the following update of activities in the Division of Corporation Finance:

• Staffing Update
• The Division employs approximately 250 accountants although a few staff members are in the process of retiring. The Division plans to post an opening for another Associate Director soon. New academic fellow Andy McLelland joined the Division staff in August 2005.
• Reviews of Registrant Filings
  Staff members are in the process of reviewing filings with the expectation of meeting its September 30, 2005 internal deadlines (The Sarbanes-Oxley Act of 2002 mandates that the Division complete reviews of all public companies at least once every three years). Ms. Stacey observed that with the issuance of the Securities Offering Reform, the Staff will likely not review registration statements for "Well Known Seasoned Issuers" that are automatically effective upon filing. Rather, the staff will focus on the periodic reports (Form 10-K and Form 10-Q) for those companies.
• Relief for Companies Affected by Hurricane Katrina
  Ms. Stacey stated that 54 registrants were identified as being significantly affected by Hurricane Katrina, 72% of which are audited by Big 4 firms. The Commission is planning various types of relief involving filing deadlines, proxy delivery, record retention/re-creation, confirmations, independence requirements, etc. Special issues, including the ability to comply with 404 requirements, and potential relief for other companies that were impacted by this disaster, will be reviewed on a case by base basis. Note: Subsequent to this meeting, on September 15, 2005, the Commission issued an order providing emergency regulatory relief to investors, companies, and securities firms affected by Hurricane Katrina. (See http://www.sec.gov/news/press/2005-132.htm)
•  Delay of Section 404 of the Sarbanes-Oxley Act of 2002 for Non-Accelerated Filers
  Ms. Stacey noted that she could not comment on the September 13, 2005 Wall Street Journal article that stated 404 may be delayed another year for such companies but did state that the staff was examining the issue. Note: As discussed above, subsequent to the meeting, on September 22, 2005, the SEC issued a release deferring the effective date of internal control reporting for nonaccelerated filers. See http://www.sec.gov/rules/proposed/33-8617.pdf
• Executive Compensation Disclosures
  Ms. Stacey noted that Statement 123(R) now provides a basis for improved, integrated disclosure about the total amount of executive compensation. However, it is unlikely that any revisions to the SEC's executive compensation disclosure rules would be effective for the Spring 2006 proxy season.
• Division of Corporation Finance Staff Training Manual
  Ms. Stacey reported that the staff has continued to make progress in updating the Staff Training Manual during the summer of 2005. It is uncertain at this point: (1) whether the update will be completed by year end and (2) how the training manual will be made publicly available.
•  Division of Corporation and Finance Current Accounting and Disclosure Issues document
  Ms. Stacey stated that the staff is planning to update this document in October or November 2005.
• 1934 Act Accelerated Filing Deadlines
  The final phase of accelerated filing deadlines are scheduled to become effective in 2006. With respect to the upcoming accelerated Form 10-Q filing deadline (from 40 days after quarter end to 35 days), Ms. Stacey noted that the SEC staff has received feedback that this deadline may be difficult for some accelerated filers. Some companies have cited required preparation time, internal management and board and audit committee review as reasons for the difficulty in meeting the new 35 day deadline.
  With respect to the upcoming accelerated Form 10-K deadline (from 75 days after year end to 60 days), Ms. Stacey stated that larger companies have indicated they could meet (and many have met) the 60 day deadline. However, other companies have indicated that meeting the accelerated Form 10-K timing may be problematic. The Commissioners may consider some relief in response to these concerns. (Note: Subsequent to the meeting, on September 22, 2005, the Commission issued a proposal related to accelerated filings of 10-Ks and 10-Qs. The proposal would create a new category of accelerated filer (large accelerated filer), defined as having public float of $700 million or more. Large accelerated filers would be required to comply with the 60-day deadline for annual reports on Form 10-K. However, no further acceleration for Form 10-K would be required for other accelerated filers. Additionally, the Commission is proposing to eliminate the final phase of acceleration for Form 10-Q for all accelerated filers. Refer to the full text of the SEC's proposal at the following link: http://www.sec.gov/rules/proposed/33-8617.pdf
• Transition Guidance for the Securities Offering Reform
  Ms. Stacey stated that the staff has indicated it will issue transition guidance in the near term. (Note: Subsequent to the meeting, on September 13, 2005, the staff issued this guidance. It is available at the following link: http://www.sec.gov/divisions/corpfin/transitionfaq.htm )
  In addition, the CorpFin legal staff issued on November 30, 2005 an additional FAQ document regarding securities offering reform implementation issues. It is available at the following link: http://www.sec.gov/divisions/corpfin/faqs/securities_offering_reform_qa.pdf
  The Committee asked if the new requirement to disclose significant unresolved SEC staff comments will affect the timing of staff reviews. The SEC staff stated there is no planned effect on comment letter timing or procedures; however, the SEC staff as well as registrants should be mindful of the deadline to resolve comments. The staff hopes the new disclosure created as a part of the securities offering reform initiative will encourage improvement on both sides in the resolution of outstanding comments.
• Public Release of Comment Letters and Registrant Responses
  Although the process of posting comment letters and responses continues, it is moving slowly due to confidential treatment redaction issues. The staff is currently working on a redaction software fix.
  Ms. Stacey further commented that the SEC Staff will issue letters to registrants when the review of the filing is completed and that comment letters and related registrant responses are subject to posting to the SEC's website 45 days after the date of the completion letters.

 C. Enforcement Update

Charles Wright provided the following update of activities in the Division of Enforcement:

• Recent Organizational and Staff Changes
  The Enforcement Division has approximately 100 accounting staff across the country, including 34 at the Washington D.C. Headquarters.
•  Recent Enforcement Cases and Investigations
  Financial fraud is still a priority for the Division. The Division continues to take referrals from the Division of Corporation Finance and tips from the website.
• Material Weaknesses/Reports under Section 404 of the Sarbanes-Oxley Act of 2002
  Mr. Wright stated that the Enforcement Division does not have an overall policy regarding material weaknesses or delinquent or untimely 404 filings. The Enforcement Division staff deals with the Division of Corporation Finance and the Office of the Chief Accountant to address these issues on a facts and circumstances basis. Jonathan Ingram stated that the Division of Corporation Finance will involve the Enforcement Division if necessary but to date, no delinquent 404 filers have been referred to the Enforcement Division.

 D. Investment Management (IM) Update

Brian Bullard provided the following update of activities in the Division of Investment Management:

• Recent Organizational and Staff Changes
  One IM staff member has left the Division and returned to industry. It is uncertain whether the position will be filled. The Division also continues to operate under an Interim Director.
• Investment Company Complex and Private Equity Funds — Independence Rules
  Mr. Bullard stated that his staff is studying this area in the hopes of providing guidance. He added that there should be a common answer for both independence situations. With respect to the format of the guidance, two options are being considered: i) new rulemaking that would change the existing definition or ii) a staff interpretation clarifying what the staff's intentions were when drafting the original rulemaking. Mr. Bullard hopes to discuss the issue with Mr. Nicolaisen in the next month. It is unlikely that any guidance will be issued before December 31, 2005.
• Auditing Standards for Financial Statements of Insurance Company Depositors of Variable Insurance Products
  Mr. Bullard stated that both formats of audit opinions continue to be acceptable (See http://www.sec.gov/divisions/investment/letters030805.htm). It is not likely that any new guidance changing this position will be issued this year.
• Business Development Companies
  Mr. Bullard commented that the Division had noted a number of compliance and enforcement issues involving registered business development companies (BDC's). Mr. Bullard observed that the incidence of problems may be due to the fact that BDC's report using Form 10-K and Form 10-Q, but must comply with investment company accounting rules. Bullard speculated that the personnel assigned to BDC audits may be unfamiliar with those rules and may be inappropriately applying Regulation S-X.

 In response to a question, the staff noted that other than off-balance sheet disclosures, it does not expect to use this release as a basis to issue comments to registrants.

 The SEC staff noted that clarifying changes have recently been made to this guidance. The SEC staff added that this guidance has helped expedite timely responses to registrants' questions and that it is also to be used when seeking guidance in auditing and independence consultations.

 With respect to communicating inquiries to the SEC staff, Carol Stacey noted that certain companies are sending questions to the Division of Corporation Finance electronic letterbox. She stated that it would be better to fax questions directly to the Division at 202-772-9213 as there is a delay necessitated in clearing and distributing the letterbox.

 The IRS rules are effective for tax returns filed after October 22, 2005. Accordingly, the new disclosure requirements would be included in Form 10-K's filed after that date. No guidance is expected to be issued by the SEC staff related to these new IRS disclosure requirements.

 The Committee provided the staff with a copy of the draft compilation that incorporates joint meeting discussion documents from the 1994 through the 2005 highlights issued to date. The draft compilation, which is organized by rule/regulation, contains numerous superseded discussion documents. The Committee would like to retain this superseded information, either by highlighting or moving the information to a separate section of the compilation. The committee requested the staff review the document and provide input on its organization and information the staff believes should be labeled as superseded. The goal is to have a document that would be posted to the AICPA website to be used for research by interested parties.

 The staff agreed to conduct the review but stated that the Staff Training Manual will take priority over the compilation.

 Topic: Disclosure Controls and Procedures

 In the event a registrant's management determines that one or more material weakness(es) in internal control over financial reporting exists as of its balance sheet date, the auditor typically expects that the registrant will conclude that its disclosure controls and procedures are ineffective as of the same date. Frequently outside securities counsel for a registrant in this situation maintains that material weaknesses that relate to internal control over financial reporting (including in situations in which there has been a material error in the financial statements resulting in audit adjustments and/or the restatement of previously issued financial statements) do not equate to ineffective disclosure controls and procedures.

 PCAOB AU 550, requires an auditor to read "other information" in a document that contains audited financial statements and the independent auditor's report thereon, and provides guidance to an auditor that identifies a material misstatement of fact in the other information or a material inconsistency between the other information and the financial statements. PCAOB Auditing Standard No. 2 extends the concept in PCAOB AU 550 regarding a material misstatement of fact to reports on internal control over financial reporting. (See paragraph 192 of PCAOB Audit Standard No. 2).

 PCAOB AU 722 has similar requirements relating to other information in a report containing the interim financial information that an auditor has reviewed. PCAOB FAQ 55 indicates that the auditor's responsibilities related to management's quarterly certifications on internal control are analogous to the auditor's responsibilities related to the company's financial statements in an interim review in accordance with PCAOB AU 722.

 In response to the question "…can a CFO/CEO reach a position in their section 302 certifications that disclosure controls and procedures are effective at a reasonable assurance level, even though there is an identified material weakness in internal control over financial reporting?", Alan Beller responded "I think the threshold for a CEO and a CFO to reach that conclusion is a high one. The reason I say that is that the concept of material weakness in the area of internal control is ultimately a weakness that leads to a more than remote likelihood of a material misstatement. And PCAOB Audit Standard No.2 makes it clear that at least in some circumstances, in evaluating whether there is a material weakness, one may take into account countervailing controls. So once you've found that there's a material weakness, the CEO and the CFO are going to have to conclude that, notwithstanding that material weakness and notwithstanding that the countervailing controls were already taken into account in determining that there was a material weakness, nonetheless, management can reach a conclusion with reasonable assurance that disclosure controls are effective. " He added that "if management is going to conclude this for purpose of its certification, there's a place to make disclosure about how one gets to those conclusions in 10-Ks and 10-Qs, and we will expect management, if there is a material weakness in internal control and management nonetheless believes that disclosure control is effective, that they will make that clear, and to explain why. We have been giving that comment. We're not looking for five pages of boilerplate; we're looking for something which is succinct and convincing that the analysis has been made and that management has reached the conclusion that it's standing behind it." (Source: Transcripts of RR Donnelley Conference "SEC, PCAOB Internal Controls over Financial Reporting: New Regulations" held on July 20, 2004. See http://www.realcorporatelawyer.com/programs.html#tele0720 for transcripts.)

 We are aware of one instance in which the Staff reviewed a registrant's disclosure of multiple material weaknesses in internal control over financial reporting as of the audited balance sheet date yet did not object to the registrant management's conclusion that disclosure controls and procedures were effective.

 What does the Staff consider in reviewing management's conclusions as to the effectiveness of disclosure controls and procedures?

 Staff Response: The SEC Staff has not issued guidance on this matter. The SEC Staff approaches this issue in the same manner as other disclosure requirements: look at what the registrant discloses, ask questions if necessary to understand the facts and circumstances, assess the reasonableness of management's conclusion, and evaluate whether the disclosure is sufficiently robust and transparent. The SEC staff acknowledged Alan Beller's statement that "the threshold for a CEO and a CFO to reach that conclusion is a high one" but also acknowledged that facts and circumstances would determine whether management could conclude that its disclosure controls and procedures were effective despite the existence of a material weakness in internal controls over financial reporting. To date, the SEC staff noted that approximately 92% of registrants that have identified one or more material weaknesses in internal controls have also concluded that their disclosure controls and procedures were not effective.

• Interpretative Examples for Staff Response

 

 Background: When a registrant concludes that previously issued financial statements should no longer be relied on because of an error or when the registrant is advised by, or receives notice from, its independent accountant that disclosure should be made or action should be taken to prevent future reliance on a previously issued audit report or completed interim review, an Item 4.02(a) and Item 4.02(b), respectively, Form 8-K should be filed by the registrant within four business days.

 In addition to other required disclosures under Item 4.02(a) and Item 4.02(b), the Form 8-K must include disclosure of the date of the conclusion regarding the non-reliance and an identification of the financial statements and years or periods covered that should no longer be relied upon.

 After a company has reported on its internal control over financial reporting, if it needs to restate its financial statements, the Committee believes the company will need to consider the need to restate its management report on internal control over financial reporting.

 Question: When a registrant files an Item 4.02 Form 8-K to prevent future reliance on previously issued financial statements or an audit report included in a Form 10-K and that contains management's report on internal control over financial reporting, should the Form 8-K address the internal control report as well?

 Committee Recommendation: The Committee believes that the Form 8-K should include explicit disclosure by the registrant that communicates:

• Whether a material weakness in internal control was identified in connection with the restatement and
• Whether management's conclusions about the effectiveness of the company's internal control over financial reporting have changed.

 Staff Response: The Staff commented that the Form 8-K rules do not require such disclosure. The Staff stated that the primary purpose of Item 4.02 is to communicate to financial statement users that the financial statements should no longer be relied upon; the item requirements do not address and were not intended to address internal control over financial reporting. The Staff commented that it is the registrant's decision what disclosures (i.e., regarding material weakness(es)) to include in its Item 4.02 8-K regarding internal control over financial reporting.

 In the discussion of this topic, the following scenario was discussed:

 In this example, the Staff commented that SEC's rules do not require a registrant to make a full reassessment of its report of internal control over financial reporting; the rules require the registrant to make only one assessment at its year-end balance sheet date (in addition, the Staff stated that while audit standards require the auditor to consider the need to revise its opinion on internal control over financial reporting in this example, the SEC's rules do not have a similar requirement). The Staff commented, however, that the registrant would have to address disclosure of the material weakness(es) in its 2004 Form 10-K/A in conjunction with its S-K Item 307 and 308(c) disclosures. Item 307 disclosures might need to be changed to state that disclosure controls and procedures were not effective as of December 31, 2004, and Item 308(c) disclosures might need to be changed to state that a material weakness in internal control over financial reporting was identified subsequent to December 31, 2004. The Staff further commented that, in accordance with Section AU 561 of the Codification of Statements on Auditing Standards, an auditor would need to issue a revised report on the registrant's internal control over financial reporting for inclusion in the 10-K/A. The staff observed that, although the registrant is not required to reassess its report on internal control over financial reporting, it may elect to do so, since the registrant would likely want an unqualified opinion on management's assessment of internal control over financial reporting from its auditors upon reissuance of the auditor's opinion. This would prompt the registrant to issue a revised management report on internal control over financial reporting.

 The staff further observed that if, at the time of the filing of an Item 4.02 8-K, a registrant's auditor has advised it that it will be issuing a revised audit report on the registrant's internal control over financial reporting, the registrant should consider whether the Item 4.02 8-K would be materially misleading if it did not disclose that fact.

 Additional Committee Question: The committee seeks the staff's clarification of the following additional question:

 Question 1: Is the registrant required to reassess the effectiveness of internal control over financial reporting under Item 308(a) in connection with a restatement on Form 10-K/A?

 View A — Yes. A registrant that becomes aware that the prior conclusion reached was incorrect as a result of the failure to identify a material weakness that existed as of the balance sheet date must revise such report. Although the rule only requires the assessment to be performed as of the end of the most recent fiscal year, the failure to correct for a known error in this disclosure would likely be considered a material omission in the registrant's disclosure that would make the disclosure misleading. This conclusion is consistent with the conclusion reached above which requires management to reassess disclosure controls and procedures in connection with the 10-K/A filing even though S-K Item 307 only requires an evaluation as of end of the period covered by the report. Further this is also consistent with the registrant's requirement to file a new 302 certification with the 10-K/A.

 View B — No. The rules only require the registrant to make an assessment as of the end of the registrant's most recent year end for Item 308(a).

 Committee view: The committee supports View A.

 Staff Response: The SEC staff stated that SEC rules require only one assessment by the registrant as of the registrant's most recent year end (i.e., View B). There is no requirement for a registrant to reassess its previous conclusion regarding the effectiveness of internal control over financial reporting (although the Staff did state that registrants are required to update its disclosure if needed to comply with Exchange Act Rule 12b-20.) Any subsequent identification of a material weakness in its internal control over financial reporting would require the registrant to make transparent and specific disclosure of the material weakness under S-K Item 308 in the Form 10-K/A.

 A general example of such disclosure in the Form 10-K/A could contain management's original conclusion on internal control over financial reporting (i.e., that its internal control over financial reporting was effective), disclose the subsequent identification of one or more material weaknesses and state that had management been aware of the material weakness at its original assessment date it might have reached a different conclusion.

 The Committee observed that such reporting by management in the Form 10-K/A could result in the auditor issuing, in the amended filing, an adverse report on management's assessment of internal controls. The auditor is required to report on both management's assessment of internal controls and on its assessment of internal controls. Under PCAOB Audit Standard No. 2, the auditor is required to consider the need to revise its opinion on internal control over financial reporting when one or more material weaknesses are identified after the issuance of the auditor's report. As such, if management doesn't update their internal control assessment or if management's report in the Form 10-K/A continues to state that internal control over financial reporting was effective at year-end and the auditor concludes, based on subsequent events, that the controls were not effective, then the auditor may be required to issue an adverse report for both the effectiveness of internal control over financial reporting and management's assessment of internal controls over financial reporting in the Form 10-K/A or issue a disclaimer.

 Background: On May 10, 2004, the Commission approved PCAOB Auditing Standard No. 1, References in Auditors' Reports to the Standards of the Public Company Accounting Oversight Board, and the Standard took effect on May 24, 2004. The Standard requires an auditor, in connection with any engagement performed in accordance with the auditing and related professional practice standards of the PCAOB, to refer to standards of the PCAOB, rather than GAAS, in his/her report.

 Question: Should audit reports filed with the Commission on the financial statements of entities that are not issuers reflect the revised report wording, and are independent public accounting firms issuing such reports required to be registered with the PCAOB?

 Discussion: The discussion in Section II.C. of Release 34-49528 indicates that the Standard applies to audits of issuers.1It states (underlining added) "the PCAOB has adopted … PCAOB Rule 3100, which requires registered public accounting firms to comply with all applicable auditing and related professional practice standards of the PCAOB in connection with the preparation and issuance of audit reports on the financial statements of issuers. Accordingly, audit reports on the financial statements of issuers must now comply with - and under Auditing Standard No. 1 auditors must state that they performed the audit in accordance with - the standards of the PCAOB."

 Commission rules may require or permit the filing of audit reports on a number of entities that are not issuers. Examples include:

• Consolidated subsidiaries2
• Equity method investees
• Collateral entities
• Predecessors
• Targets
• Acquired Businesses

Staff Response: The following schedule outlines the staff's views regarding these questions:

(1)  This guidance is applicable to audit reports issued or dual dated with latest date after 10/21/03 (or 7/18/04 for foreign auditors).

(2)  This guidance is applicable to audit reports issued or reissued on or after May 24, 2004.

(3)  The term ‘issuer' means an issuer (as defined in Section 3 of the Exchange Act), the securities of which are registered under Section 12 of that Act, or that is required to file reports under Section 15(d) of that Act, or that files or has filed a registration statement that has not yet become effective under the Securities Act of 1933. See Section 2(a)(7) of the Sarbanes Oxley Act and PCAOB Rule 1001.

(4)  The financial statements that are filed with an initial registration statement need not be audited by a registered firm. Once the company has filed a registration statement, however, it is an "issuer" and any subsequent or restated financial statements must be audited by a registered firm.

(5)  The auditor of the financial statements of the non-issuer entity must be registered if, in performing the audit, the auditor played a "substantial role" in the audit of the issuer, as that term is defined in PCAOB Rule 1001(p)(ii). If the "substantial role" test is not met, the firm is not required to be registered.

(6) Rule 2-02 of Regulation S-X requires that the auditor's report state whether the audit was conducted in accordance with GAAS. In Release No. 34-49708, the SEC stated that "references in Commission rules…to GAAS or to specific standards under GAAS, as they relate to issuers, should be understood to mean the standards of the PCAOB plus any applicable rules of the Commission" (emphasis added). In the situation identified in the chart above, the view of the SEC staff is that the reference to GAAS in Rule 2-02, as applied to the other auditor's report, does "relate to an issuer" for purposes of Release No. 34-49708 and that, therefore, the other auditor's report must refer to the standards of the PCAOB.

(7)  Even though the other auditor's report is not required to refer to the standards of the PCAOB, if the issuer's auditor uses the work of the other auditor, that audit work must be performed in accordance with the standards of the PCAOB.

(8)  The entity is itself an issuer and so must comply with issuer rules.

 Committee Interpretive Examples: The Committee also seeks the Staff's view on the following interpretative examples:

 Example 1 — Unregistered Auditors and Financial Statements Updated for Additional Interim Period

 Company files an IPO registration statement that includes audited financial statements for the three years ended December 31, 2004 and unaudited interim period financial statements for the six months ended June 30, 2005 (with comparative prior year period).

  The financial statements are audited by an unregistered independent accounting firm whose report is included in the registration statement.

 Company files Amendment 1 to the registration statement in November 2005 that includes audited financial statements for the three years ended December 31, 2004 with no changes from the financial statements originally filed. The interim financial statements are updated to include unaudited financial statements for the nine months ended September 30, 2005 (with comparative prior year period). Company expects Amendment 1 to be declared effective.

 The auditors' report from an unregistered firm continues to be acceptable in Amendment 1 and upon effectiveness.

 In subsequent Exchange Act filings and new registration statements it is acceptable to carry forward the report of the unregistered auditors for years ended before 2005.* The audit for 2005 must be performed by a registered firm.

 Staff Response: The staff concurred with the above example.

 Example 2 — Unregistered Auditors and Financial Statements Updated for Annual Period

  Company files an IPO registration statement that includes audited financial statements for the three years ended December 31, 2004 and unaudited interim period financial statements for the nine months ended September 30, 2005 (with comparative prior year period). The financial statements are audited by an unregistered independent accounting firm whose report is included in the registration statement.

 Company files Amendment 1 to the registration statement in March 2006 that includes audited financial statements for the three years ended December 31, 2005 (i.e., a new year of audited financial statements is filed). No changes are made to the financial statements for the two years ended December 31, 2004. Company expects Amendment 1 to be declared effective.

 In Amendment 1 and upon effectiveness the auditors' report from an unregistered firm continues to be acceptable covering the two years ended December 31, 2004* but the year ended December 31, 2005 will require audit by a registered independent accounting firm.

  In subsequent Exchange Act filings and new registration statements it is acceptable to carry forward the report of the unregistered auditors for years ended before 2005.

 Staff Response: The staff concurred with the above example.

 Example 3 — Unregistered Auditors and Financial Statements Restated for Error Correction

 Company files an IPO registration statement that includes audited financial statements for the three years ended December 31, 2004 and unaudited interim period financial statements for the six months ended June 30, 2005 (with comparative prior year period).

 The financial statements are audited by an unregistered independent accounting firm whose report is included in the registration statement.

 Company files Amendment 1 to the registration statement in November 2005 that includes audited financial statements for the three years ended December 31, 2004. The financial statements for only the year ended December 31, 2004 is restated for a material error correction. The interim financial statements are updated to include unaudited financial statements for the nine months ended September 20, 2005 (with comparative prior year period). Company expects Amendment 1 to be declared effective. In Amendment 1 and upon effectiveness an auditors' report from an unregistered firm continues to be acceptable covering the two years ended December 31, 2003 but the year ended December 31, 2004 requires audit by a registered independent accounting firm.

 In subsequent Exchange Act filings and new registration statements it is acceptable to carry forward the report of the unregistered auditors for years ended before 2004.* The audits for 2004 and 2005 must be performed by a registered firm.

 Staff Response: The staff concurred with the above example.

 Example 4 — Unregistered Auditors and Financial Statements Revised for Immaterial Changes

 Company files an IPO registration statement that includes audited financial statements for the three years ended December 31, 2004 and unaudited interim period financial statements for the six months ended June 30, 2005 (with comparative prior year period). The financial statements are audited by an unregistered independent accounting firm whose report is included in the registration statement.

 Company files Amendment 1 to the registration statement in November 2005 that includes audited financial statements for the three years ended December 31, 2004. The financial statements for the two years ended December 31, 2003 are revised for a minor reclassification among income statement line items for which there will be no reference in the auditors' report. The financial statements for the year ended December 31, 2004 do not change. The interim financial statements are updated to include unaudited financial statements for the nine months ended September 30, 2005 (with comparative prior year period). Company expects Amendment 1 to be declared effective.

 The auditors' report from an unregistered firm continues to be acceptable in Amendment 1 and upon effectiveness.(*)

 In subsequent Exchange Act filings and new registration statements it is acceptable to carry forward the report of the unregistered auditors for years ended before 2005.* The audit for 2005 must be performed by a registered firm.

 (*) The unregistered auditors' reports will continue to be accepted in future filings unless the years covered by those reports require revision to financial statements for restatements, either as a result of error correction or application of GAAP that requires retroactive revision (e.g., discontinued operations, change in segments, accounting changes, etc.).

 Staff Response: The staff concurred with the above example.